SBA

Digital Discrimination

Many people perceive the Internet, and in particular the World Wide Web, to be the digital equivalent of the Wild West - newly discovered prairies of largely unregulated opportunity where people can be influenced through virtually unfettered free-speech or propaganda, new markets can be reached without any need to invest or pay corporate taxes in the customer’s communities, pornography can be sold and bought without shame, terrorists and subversives can collaborate out of sight of state authorities, data and intellectual property may be stolen without fear of prosecution etc.  If we’re honest, such perceptions are not far from the truth - the Internet does not have many passports, borders or customs inspectors. 

If I want to sell my goods or services to those few wealthy private residents of Bhutan (where sales tax is 50%) or to residents in Hungary (where VAT is 27%) in competition with local suppliers, then as long as my goods are small enough to ship economically, or can be supplied digitally, I can probably deliver them without any investment into the Bhutanese or Hungarian economies. As an offshore supplier I can probably avoid taxation on my supplies by ensuring that I invoice from and receive payment in a jurisdiction that will not force me to collect taxes on behalf of my foreign customers. Whether those customers are charged import duties or purchase taxes by their local tax authorities is their problem (and risk).

Similarly if I want, as a private citizen, to buy a few thousand pounds worth of cloud-computing services from a data-centre in Moscow, who’s going to tax me? And what’s the likelihood of Customs picking-up on the book-sized packet I received from the USA containing an expensive new gadget which is not yet sold in Europe?

And so on - you get the picture, the World-Wide Web is, well I guess, Worldwide. With the notable exception of the Great Firewall of China there are few inhibitors to international data flows, and few tariffs. Which is probably as it should be because it was intended that way to enable the unfettered sharing of information. Goods sold across borders and shipped in small packets are a different matter - but that problem existed before the Internet and the only real difference today is that as volumes of such small international shipments have massively increased the likelihood of Customs spotting the taxable items has significantly decreased.

So yes, except for the tall poppy corporations - the likes of Amazon, Google, Facebook, Netflix, Pokerstars et. al. - the Internet is significantly under-regulated, under-Policed and under-Taxed in comparison with the high street; and that suits many of us as individual consumers and small businesses. It doesn’t however suit everyone. Most particularly it doesn’t suit Governments who lose tax revenues from many small suppliers and / or consumers, and it doesn’t suit those tall poppy corporations who because of their size are such major and prominent beneficiaries of the cross-border trade facilitated by the Internet that Governments and tax authorities pick on them, putting them at a competitive disadvantage when compared with their smaller, “under the radar”, Internet rivals (albeit arguably bring them onto a par with the bricks and mortar high-street businesses). One could argue that in a worldwide marketplace the concept of nation-state regulation and sales taxes is an anachronistic legacy of an essentially broken model - but it is a model on which the Governments of almost all nations depend. 

So then, there are two very powerful constituencies which want, for different reasons, to see the Worldwide Wild West tamed - Governments and big business. 

In his recent budget the UK Chancellor of the Exchequer announced new measures to tax, in particular, big Internet businesses which minimise their UK tax exposure by paying royalties on the intellectual property component of their sales to “low tax jurisdictions” - I suppose that means the IoM, Ireland and everywhere else that has lower corporation tax than the UK. This new move to tax the large businesses who transact with UK residents via the Internet has been widely applauded in the UK, but may have its downsides. 

The UK can only effectively enforce its new digital companies tax regime on those companies which have some establishment in the UK, meaning that the first consequence will be that some of the big non-UK players withdraw their establishments from the UK, whilst smaller foreign digital companies will avoid establishment in the UK as they grow. I can’t help thinking that the UK Chancellor has been exceedingly stupid in simultaneously incentivising global digital businesses to avoid setting up UK offices to avoid the new UK digital royalties tax regime and reducing the highly-paid employment opportunities they would have brought to the UK. 

Unless the UK follows China and erects its own national Fortress UK Firewall to prevent consumers from using unapproved non-UK digital services this attempt to impose national control on a worldwide market seems destined to do the UK far more harm than good. It will also legitimise the creation of reciprocal taxation or tariff mechanisms by other countries against the wide range of digital exports which the UK supplies to the rest of the world - essentially creating a triple-whammy for the UK of corporation tax erosion, high-value employment erosion, and new tariffs on UK digital exports.

Having said that, its difficult to see what alternatives the UK Chancellor had - he either did nothing or attempted, like King Canute, to tax the incoming tide of digital services and the corresponding outflow of UK consumer spending. Doing nothing was probably the less harmful option but the UK’s action is symptomatic of the problem faced by most first world nations as global consumption of digital services rises. Geographic borders are increasingly irrelevant to trade.

At the same time, over in the USA, the big digital corporates and telecommunication providers are again lobbying the US Government and Federal Communications Commission to overturn the principle of Net Neutrality. This is the principle that says all data traffic on the Internet is of equal importance and prevents the telecommunication companies which operate the Internet from prioritising one service provider’s data at the expense of another type of traffic. 

For example Netflix or Amazon might like to be able to pay telecommunication companies to prioritise their commercial video streaming data to enhance the quality to their customers - or more cynically to effectively de-prioritise the video streaming data of their smaller and less wealthy competitors. Whilst the proposal initially most affects American digital content providers and consumers, ultimately it sets precedent which would lead to a tiered Internet, where “high-value” commercial services to wealthy consumers get priority, and your Skype videoconferencing, Youtube videos, BBC news, email and other free or low-cost services would become slower and less reliable. 

Both the UK’s new digital companies royalty tax proposal and the US Federal Communication Commission’s ironically titled “Restoring Internet Freedom” proposal demonstrate that the Internet is becoming politicised, commercialised and regulated to discriminate in favour of governments, the  taxman and big businesses against the interests of small businesses and consumers. As a small nation of small businesses we are pretty powerless to influence these matters, but like the rest of the world we have become accustomed to an Internet that is open, fair and provides opportunity to all, for good or bad. Next year that may no longer be true.